Chapter 9: Judgement & Decision Making

Question 1

Rational Behavior

Answer 1

Objective and logical

Question 2

Irrational behavior

Answer 2

More subjective and biased

Question 3

Psychological bias

Answer 3

Psychological factors affect our decision making in consistent ways

Question 4

We are predictably irrational, which means

Answer 4

Our errors are systematic and reliable

Question 5

Thinking fast (System 1)

Answer 5

Refers to decision making that operates quickly with little effort and less control

Question 6

Thinking slow (system 2)

Answer 6

Refers to decision making that operates more slowly, with more effort and more deliberate control

Question 7

Heuristics

Answer 7

mental shortcuts we take as part of thinking fast

Question 8

Base rate frequencies OR prior probabilities

Answer 8

Probabilities that reflect the state of the world - how often an event or situation actually occurs

Question 9

Representative Heuristic

Answer 9

The mental shortcut used to estimate the likelihood of an event based on how closely it matches or represents related examples or stereotypes in mind; but it causes people to focus on stereotypes

Question 10

Conjunction fallacy

Answer 10

The false assumption that a combination of conditions is more likely than either condition by itself

Question 11

Law of Sample Size

Answer 11

Smaller sample sizes produce more variance

Question 12

Gambler’s fallacy

Answer 12

The faulty reasoning that past events in a sequence affect the likelihood of future events

Question 13

Hot-hand effect

Answer 13

The perception of being “on a roll”

Question 14

Availability Heuristic

Answer 14

Shows that people estimate the frequency of an event based on how easily examples come to mind

Question 15

Anchoring

Answer 15

Refers to how different starting points (initial values) produce different estimates or decisions

Question 16

Decoy Effect

Answer 16

The introduction of a more or less expensive item provides an anchor to stimulate the sales of the target item

Question 17

Deliberation-without-attention effect

Answer 17

You have consciously made a decision, but unconscious processes helped you reach it

Question 18

Less-is-More effect

Answer 18

Refers to situations where too much information, computation, or time devoted to a problem may lead to less accurate, sensible, or satisfying decision

Question 19

Recognition Heuristic

Answer 19

People who are presented with 2 alternatives place higher value on the one they recognize vs the one they don’t

Question 20

Fluency Heuristic

Answer 20

People assign higher value to the option that is recognize first, that is, more quickly and easily

Question 21

One-Clever-Cue Heuristic

Answer 21

To base one’s decision on a single cue

Question 22

Take-the-best-cue Heuristic

Answer 22

The idea that you consider each cue in turn

Question 23

Fast-and-frugal search trees

Answer 23

Involve a limited set of yes or no questions rather than a larger set of probabilistic ones

Question 24

Tallying

Answer 24

A heuristic that simply involves counting the number of cues that favor one alternative over another

Question 25

We make choices that maximize:

Answer 25

Utility, which is the satisfaction we obtain from choosing an option

Question 26

Rational Choice Theory

Answer 26

We make decisions by comparing the expected value of our options

Question 27

Normative theories

Answer 27

Based on rational, logical, and mathematical calculation to compare decision options, explaining how decisions should be made in order to maximize utility and rewards

Question 28

Descriptive theories

Answer 28

Concerned with how we actually decide, describing beliefs, and preferences as they are, not as they should be

Question 29

Decision making deviates from normative analysis for what 2 main reasons?

Answer 29

1. Options are ambiguous, or open to more than one interpretation
2. Utility is subjective; it is dependent on the decision maker and context

Question 30

Loss aversion (AKA prospect theory)

Answer 30

People hate losses more than they enjoy equivalent gain, and they tend to prefer a sure gain over risky game

Question 31

When faced with a sure loss, people become _____

Answer 31

Risk seeking; they are willing to lose more if the bet allows them a small chance of avoiding any loss

Question 32

Framing effects

Answer 32

How problems are framed or presented produces radically different decisions

Question 33

Status Quo Bias

Answer 33

Is a preference for the current state of affairs. Any change from how things are, or even the act of considering a change, requires time, effort, and frequently money (these negatives are known as transaction costs)

Question 34

Optimal Defaults

Answer 34

Automatically placing people into options that have the greatest benefit

Question 35

Endowment Effect

Answer 35

The tendency to overvalue what one has in hand

Question 36

Sunk cost effect OR Concorde Fallacy

Answer 36

A maladaptive behavior; the greater tendency to continue an endeavor once an investment in money, effort, or time has been made

Question 37

Neuroeconomics

Answer 37

A field that combines insights from economics, neuroscience, and psychology

Question 38

Willingness to pay

Answer 38

The decision of whether someone will purchase an option or item

Question 39

Raise the prospect of using brain scanning to predict product preferences, a field known as _____

Answer 39

Neuromarketing